If an employee is paid an allowance based on a per-kilometre rate that CRA consider reasonable, then there is no need to deduct CPP contributions, EI premiums, or income tax.

canada Revenue Agency considers an allowance to be reasonable if all the following conditions apply:

The allowance is based only on the number of business kilometres driven in a year.
The rate per-kilometre is reasonable.
The employer did not reimburse the employee for expenses related to the same use of the vehicle. This does not apply to situations where the employer reimburse an employee for toll or ferry charges or supplementary business insurance, if the allowance was calculated without including these reimbursements.

The type of vehicle and the driving conditions usually determine whether CRA consider an allowance to be reasonable.

The per-kilometre that CRA usually consider reasonable are the amounts prescribed in section 7306 of the Income Tax Regulations. Although these rates represent the maximum amount one can deduct as business expenses, they can be used as a guideline to determine if the allowance paid to an employee is reasonable.

The automobile allowance rates for 2011 are 52¢ per kilometre for the first 5,000 kilometres, and 46¢ per kilometre thereafter. In the Northwest Territories, Yukon, and Nunavut, there is an additional 4¢ per kilometre for travel.

Other Taxable Benefits relating to Use of Automobile for employment/business purposes.

Standby Charge

The standby charge is a taxable benefit that is required to be included as income on the personal tax return of employees who use an automobile provided by employer. The benefit is meant to represent value derived from the benefit by the employee from the personal use and availability of a vehicle provided by employer. The standby charge is calculated as follows:

=2/3 x Lease Payment (Excluding insurance) x availability factor

The standby charge can be reduced if certain criteria are met (i.e. car required to do employment work, car used more than 50% of the time for business purposes, and kms for personal use is not more than 1,667 per month).

Operating Cost Benefit

Method 1: Basic or Fixed-Rate Calculation:
With this method, the operating cost benefit is calculated by multiplying the number of personal kms driven by a rate set by the CRA. In 2012, the rate is $0.26 per km of personal use.

An individual receiving a reasonable mileage allowance that is NOT taxable, can include it in income if they wish to deduct actual expenses that are in excess of the reasonable tax-free KM allowance. This is done on a T777 form that you file with your personal tax return (the mechanics are that you calculate your allowable motor vehicle expenses prorated for employment purposes, then deduct from this, the non-taxable mileage allowance received).